"Insurers do not present the same systemic risk" as banks, say lawyers

“The omission of a power to direct insurers not to renew existing policies in IPSA was highlighted in the Trowbridge report into the failure of CBL Insurance and the International Money Fund’s review of the financial sector,” the two pointed out in response to the consultation, part of which is seeking feedback on whether the prudential regulator should be able to prevent renewals.

“However, if the RBNZ has the power to direct an insurer not to renew policies, this could create significant problems for some types of policyholders, particularly in relation to life or health insurance. As the RBNZ suggests, restrictions could be placed on this power requiring that the RBNZ have regard to policyholder interests.”

In MinterEllisonRuddWatts’ view, it will be critical to balance the need to reduce an insurer’s exposure and the policyholder’s interests in maintaining their cover and current insurance cost.

In the consultation, the RBNZ is suggesting expanding its information powers, in part to bring IPSA in line with the other sectors it regulates, such as banks, non-bank deposit takers, and financial markets infrastructures (FMI). Proposals also include the power to carry out on-site inspections at insurers’ premises even without prior notice.

Read more: RBNZ holds consultation on insurance enforcement, distress management

Commenting in an online post, Kavanagh and Horne stated: “We question the consultation’s heavy reference to the Deposit Takers Bill. The RBNZ implies in its consultation that a number of enforcement tools and distress management tools should be broadly consistent with those for banks in the Deposit Takers Bill.

“We generally accept this premise in relation to penalties and enforcement action. However, we consider that the same level of regulation is not warranted for the insurance industry in relation to distress management. In comparison with banking, insurers do not present the same systemic risk.”

To illustrate, the MinterEllisonRuddWatts partners stressed that when an insurer fails, the event is not likely to bring about a broader collapse across the insurance industry.

“We have seen this, for instance, with the collapse of CBL, which did not result in consequential failures,” they noted. “The RBNZ’s proposal to be responsible for resolutions in relation to statutory management may be overzealous.”

The lawyers added: “We also recommend that the RBNZ exercises caution in creating its approach to intervention in the case of an insurer’s insolvency. The concept of the ladder of intervention is that enforcement is proportional and progresses as solvency levels decline.

“Therefore, should the RBNZ wish to allow the entire range of enforcement actions to be available at the first rung of the ladder (Solvency Capital Requirement), it must ensure that it adopts an approach consistent with the ladder of intervention model in its published guidance.”

The regulatory body, meanwhile, provided a long period to gather feedback, given the range of industry consultations that are ongoing. And, if the law firm’s sentiments are shared by others, it’s possible that the proposals in question might not come to fruition.  

In the consultation paper, the RBNZ declared: “Following the Treasury’s review of the Reserve Bank Act 2021, our legislation is being restructured. By the time any amendments to IPSA are introduced, there will be one piece of legislation to shape the Reserve Bank’s institutional structure and governance (the Reserve Bank Act 2021).”

“Then there will be three ‘sectoral acts’ sitting beneath that institutional framework: IPSA, the Financial Markets Infrastructures Act (2021), and a ‘deposit takers act’ (DTA),” it continued. “The DTA will bring together the prudential framework for banking (currently contained in the Reserve Bank Act) and non-bank deposit takers. The DTA has not yet gone through the Parliamentary process but an exposure draft has been published.

“While there are important differences between the sectors, there are also some core similarities in how financial sector prudential regulation is carried out. We will seek to apply similar rules to each sector unless there are good reasons for different treatment. The contents of this consultation paper are particularly amenable to alignment so our working assumption is that we should amend IPSA to align with the draft DTA and FMI legislation unless there are strong reasons not to.”